An index fund is a mutual fund, exchange-traded fund (ETF), or unit investment trust (UIT). These funds follow a passive investment strategy designed to achieve approximately the same return as a particular index before fees. An index fund will attempt to achieve its investment objective primarily by investing in the securities (stocks or bonds) of companies that are included in the selected index. Some index funds may also use derivatives (like options or futures) to help achieve their investment objective or invest in a representative sample of the companies included in an index.
Passive management usually translates into less trading of the fund’s portfolio (lower transaction costs), more favorable income tax consequences (lower realized capital gains), and lower fees and expenses than actively managed funds. Over time, higher fees and expenses can significantly lower investment returns.
